I Work in Finance, Are My Taxes Going Up?

November 16, 2021

In my conversations with financial professionals (private equity professionals, investment bankers, asset managers), I commonly ask the question, “what are you most concerned about as it pertains to your personal wealth management?” The answer, almost unanimously, revolves around taxes. This is a major area of concern, and the past year has left many people scratching their heads as they have tried to keep up with the proposals out of Washington D.C. But it still has left everyone asking – “are my taxes going up?”

There are many types of taxes that have been proposed, changed, added, and negotiated that could affect financial professionals significantly. Here are the major items as well as some ideas to consider ahead of year-end.

Surtax on high earners with modified AGI above $10 million

In the latest proposal, there would be a 5% surtax on modified AGI (not taxable income) of more than $10 million. For those with income greater than $25 million, there would be an additional 3% surtax bringing the total to 8%. Effectively at this top bracket, the rate would be 45%. Since these taxes would be levied on modified AGI, they could not be avoided by taking large, itemized deductions.

This will be a major consideration when thinking about large, carried interest, or deferred compensation plans that could build and add significant amounts of income during a calendar year. It will be important to plan appropriately if those types of years are known in advance.

Prohibition on Roth Conversions and Backdoor Roth Contributions

The Roth IRA is one of the greatest savings vehicles for any individual, given its tax status. For many financial professionals, there was not a direct path to getting assets into a Roth; however, there were other strategies, including the Roth conversion and the Backdoor Roth, that were extremely beneficial.

The current proposal would completely eliminate the Backdoor Roth, and Roth conversions would be prohibited for taxpayers with taxable income exceeding $400,000 for single, $450,000 married. With a few weeks left in 2021, there may be opportunities to take advantage of these strategies today ahead of any reform by year-end.

What wasn’t included?

There have been many iterations of the proposal so far in 2021. The latest proposal saw a few major elements that financial professionals were worried about not included in the latest package. Those included the highest tax bracket increasing to 39.6% from 37%, increasing capital gains on the highest tax bracket to 25% from 20%, and finally, a reduction in the federal estate exemption from roughly $11.7 million to about $6 million.

These changes were beneficial to most financial professionals that would have been affected by them. However, many of them may still be negotiated, or at the least, will be discussed before the sunset of the current tax laws in 2025.

This proposal is still being debated in D.C., and there are many different rounds of negotiations that will occur but being proactive in certain areas of your financial life, especially as a financial professional, could save you money and increase your wealth into the future.

No representation is being made that any strategy shown will or is likely to achieve results similar to those shown in this presentation. BDF does not provide legal, tax, insurance, social security, or accounting advice. Clients of BDF should obtain their own independent tax, insurance, and legal advice based on their particular circumstances. The information herein is provided solely to educate on a variety of topics, including wealth planning, tax considerations, insurance, estate, gift, and philanthropic planning.